Barclays Vindicated as Blown Chavez Call Redeemed: Andes Credit
When Barclays Plc (BARC) recommended investors buy Venezuelan bonds on the bet President Hugo Chavez would lose his re-election bid in October, the bank said his cancer battle could drive him out of office even if he won.
While Chavez rolled to an 11 percentage point victory that sparked the worst one-day bond rout in four years, the call is now rewarding investors with a 7 percent return this month that is more than 20 times the average for emerging-market debt. The surge pushed returns to 49 percent this year as Chavez’s cancer recurrence fuels speculation he’ll be replaced by a president who seeks to lure the investment he drove away.
Barclays’s New York-based analysts, led by Venezuelan-born Alejandro Grisanti, say the rally isn’t over because the government’s debt remains cheap versus developing-nation peers. Venezuela’s dollar bonds due 2020 yield 8.76 percent, compared with yields below 5.5 percent on similar-maturity notes issued by Vietnam and Mongolia, countries that share the South American nation’s B+ credit rating from Fitch Ratings.
“We always stuck to our Venezuelan bond position because we believe there’s the possibility of a peaceful and democratic change of office,” Grisanti, 46, said in a telephone interview. “We weren’t wrong and we continue to believe in that. This bond rally will continue.”
The gains in Venezuelan dollar debt are the second biggest in emerging markets this month after Argentine bonds and the second best this year, trailing only Ivory Coast notes, according to JPMorgan Chase & Co.’s EMBI Global index. Yields on Venezuela’s benchmark bonds due 2027 have plunged 4.55 percentage points this year to 8.94 percent.
Chavez, a self-declared socialist who has seized more than 1,000 companies since taking office in 1999, underwent six hours of surgery in Cuba on Dec. 11 for cancer he first said he had in June 2011.
The 58-year-old former paratrooper, who has never specified what kind of cancer he has, is making a “favorable” recovery after bleeding caused complications during the surgery, Information Minister Ernesto Villegas said in a nationally televised address today. Villegas said yesterday that Chavez may not recover in time to make it back for the Jan. 10 inauguration.
Speculation began to mount in late November that Chavez’s health was faltering as he disappeared from public view five weeks after his Oct. 7 election victory over opposition candidate Henrique Capriles Radonski. Chavez reappeared in the early morning hours of Dec. 7 and announced a day later that he would need more surgery. He urged Venezuelans to back Vice President Nicolas Maduro as his successor if he is unable to continue in office.
Venezuelan law stipulates that if Chavez steps down before the Jan. 10 inauguration, Maduro would serve the rest of the current term before handing over power to the National Assembly president, Diosdado Cabello, who must call for elections within 30 days. If Chavez starts his new six-year term and then steps down within the first four years, the vice president takes over while elections are arranged within a month.
“There’s a change in Chavez’s behavior that makes one think he’s very sick,” said Grisanti, who raised Venezuelan debt to overweight in September and predicted Capriles would “likely” win the October vote. “The naming of Maduro by Chavez indicates that a peaceful transition rather than a chaotic one is possible in Venezuela in 2013.”
Grisanti said in an October interview that he uses his experience in Venezuelan politics to help guide his bond market calls. He has run unsuccessfully for public office as a member of Primero Justicia, the party co-founded by Capriles.
Chavez, an ally of ex-Cuban President Fidel Castro, has imposed caps on consumer prices, restricted Venezuelans’ access to dollars and taken foreign reserves from the central bank to fund social projects. Foreign investment averaged $1.05 billion a year between 2006 and 2011, a 58 percent tumble from the previous six-year period, the United Nations said in a May report.
In the black market, where Venezuelans purchase foreign currency when they can’t buy it through government-authorized channels, the bolivar has weakened 46 percent this year to 16.09 per dollar, according to Lechuga Verde, a website that tracks the market. The government sets official exchange rates of 4.3 bolivars and 5.3 bolivars per dollar for authorized transactions.
Venezuela’s benchmark bond yields could fall to as low as 4 percent if Chavez’s government is replaced by an administration that seeks to attract investment and boost oil production, according to Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets in Miami.
The country has the world’s largest oil reserves, totaling about 300 billion barrels, according to the BP Statistical Review of World Energy. While Venezuela remains the biggest oil producer in South America, its output has fallen to about 2.8 million barrels a day from 3.1 million barrels a day when Chavez took office in 1999.
“Venezuela’s oil wealth is ridiculous,” Bernal, who began recommending investors buy the country’s bonds in April, said in a telephone interview from Miami. “A boom should occur in a scenario where reserves are well managed and there’s a friendlier approach to business.”
Capriles, 40, proposed allowing more foreign investment in the oil industry to boost production and said he would unwind Chavez’s currency and price controls. He is seeking re-election as governor of Miranda state in nationwide gubernatorial elections on Dec. 16.
A Capriles loss to the “Chavismo” candidate, Elias Jaua, could spark declines in Venezuelan bonds because it would leave the opposition without a clear-cut choice to stand in emergency presidential elections, according to Ben Ramsey, an analyst at JPMorgan.
JPMorgan had an overweight recommendation on Venezuelan debt from August 2011 until Sept. 17 and then reinstated that call on Oct. 10 following the post-election selloff.
“Venezuela has rallied a lot,” Ramsey said in a telephone interview in New York. “You may have a scenario that can push it down.”
The extra yield investors demand to hold Venezuelan government dollar bonds instead of U.S. Treasuries dropped five basis points, or 0.05 percentage point, to 759 basis points at 3:37 p.m. in New York, according to JPMorgan’s EMBI Global index. The yield gap has fallen 121 basis points this month.
Five-year credit-default swaps insuring Venezuelan bonds against non-payment rose 10 basis points to 601 basis points. The contracts pay the buyer face value in exchange for the underlying securities or cash.
Yields on state-controlled oil company Petroleos de Venezuela SA’s dollar bonds due 2017 rose 10 basis points to 9.03 percent, according to data compiled by Bloomberg. The yields have dropped almost 6 percentage points from 15 percent at the end of last year.
The oil company’s bonds will also keep rallying in line with government debt, according to Grisanti.
Like JPMorgan’s Ramsey, Grisanti said he will be watching the gubernatorial elections for clues on how an emergency presidential election could turn out next year. A victory by Capriles would signal that he can defeat whichever candidate the Chavez supporters put up against him, Grisanti said.
“There could be a bigger rally in Venezuelan bonds after the elections,” Grisanti said. “They’ll be key to understanding how Chavismo does without Chavez.”